We Are Already Hyper Inflating

ForEx jocks make or lose coin by guessing the direction of EUR/USD. Stock
pick aces ride the wave and look good while trends remain in place. Commodity
bulls can't miss until the next miss is eventually driven home with a loud
crash. It seems as if everybody is clinging to a conventional way of doing
things, as if the world was not radically changed in and around 2001, and as
if the old rules of the previous secular bull market still apply. They do not;
it is the age of inflate-or-die, booms and busts.

As for deflation believers, while they may be diametrically opposed to the
vast bullish apparatus that depends on ever increasing debt levels and currency
depreciation, they are right there with their bull counterparts, generally
playing to convention and playing by rules they think they know; following
breadcrumbs laid out for them to follow as they issue dire projections about
credit contraction and violent asset markdowns.

Let's quiet the noise and look at the US Treasury bond market, which is arguably
the most important market on earth, as it is intimately tied to the world's
reserve currency.

The following chart shows the T-Bill yield (IRX), the broad US market (SPX)
and the CRB commodity index as measured against the beautiful continuum that
is the well behaved yield on the 30 year Treasury Bond (grey shaded area).
The continuum is of course framed by the declining 100 month exponential moving
average and the lower red dotted trend line that parallels it.

As applies to the current system, convention went out the window in late 2000
as the S&P 500 took a dive (to conclude its secular bull market) and was
promptly attended by a crashing T Bill yield as Alan Greenspan goosed the curve,
launching gold's secular bull market in the process. After a lag, general commodities
followed gold higher as did eventually, the SPX. With T-Bills at what we thought
at the time was an outrageous 1%, the system was re-liquefied.

This was Greenspan's willful attempt to re-inflate the economy and we all
know what eventually happened; capital was created out of nowhere, and misallocated
into the most dangerous 'investments', overseen by the best, brightest and
most connected on Wall Street, who of course made a killing packaging newly
engineered creations. The malinvestments eventually manifested in an epic and
terminal crash. The age of inflate-or-die goes hand in hand with moral hazards
being routinely mainlined into the system.

Looking at the chart, the lower red dotted trend line and the EMA 100 form
the backbone by which all of this surreal finance has been supported since
the age of inflation onDemand began its most intense phase, in 2000. Be aware
that the shaded area format of the monthly chart shows monthly closing data,
so it does not show the several times the yield pinged the critical EMA 100
intra-month before reversing lower.

Heck, let's review our favorite chart below, illustrating the continuum. Pre-2000,
the system ran quite well by leveraging global confidence in Uncle Sam and
his Treasury, as Greenspan himself leveraged the goodwill force fed into the
system by Paul Volcker, who did the heavy lifting in deciding that the inflation
problem of the 70's would end on his watch, no matter the cost. Sadly, his
successor at the Fed had no such resolve as he was given the gift of goodwill.
The reason we now find ourselves in a metaphorical Wonderland is because Ben
Bernanke has amped up the inflation ante even though his predecessor left him
with no seed corn, no goodwill whatsoever. Yet still he inflates.

Post-2000, with the implosion of paper asset markets that had concluded a
secular bull market, and considering the inflationary policies in response,
one might have expected long term yields to become unruly as the precious metals
and then the commodity complex began to rise, sniffing out the creation of
'funny munny'. Instead, the long bond yield remained well behaved within the
continuum as the free enterprise dominated US and Communist China pursued a
cozy relationship of convenience, which could best be described as a macro
economic vendor financing scheme ('we will outsource our industry, leverage
confidence and credit and become your consumer engine if you will convert your
US currency reserves to Treasury bonds, helping us stay liquid').

This was an epic pyramid scheme by which the US created paper (debt) and used
it to continue running its economy on the vaunted US consumer. All the while,
PE ratios were calculated, rosy projections were made and bountiful bonus seasons
came and went... all based on the lie that pretends productivity can be printed
through debt.

In 2008, the continuum did something asymmetrical as the yield plunged into
what NFTRH calls Armageddon
'08. Time Magazine published a cover showing bread lines and 'Depression 2.0'
headlines and the conventional herd went absolutely hysterical. This was to
the benefit of the people who were able to remain calm and get bullish. The
deflation event was on and the most gullible deflation believers took the breadcrumbs.

Now a mature rebound in both asset markets and the bond's yield brings us
to a crossroads and a question; will another red dot appear at the EMA 100
as inflation expectations peak and the entire construct reverses into yet another
deflationary episode, or will it be different this time as the inflationary
horse gets out of the barn due to a saturation point at which the public no
longer buys the deflation spook that Ben Bernanke keeps pulling out of the
closet? This would propel an equal and opposite upside reaction to the lower
channel buster that was the most recent green dot.

The script would typically call for the predictable (to contrarians) downturn
into a new deflationary episode, and that may well be in store. But we have
to realize that confidence has hit a saturation point, as outward signs of
rebellion surface within mainstream society. Meanwhile, the Fed chief and his
sycophants continue full speed ahead, scaring the crap out of most everyone
with a modicum of economic acumen in the process; but people are not afraid
of deflation now. Inflation fears will break out if the EMA 100 gives way.
This would be uncharted territory for the current system.

Here are some money supply graphs for consideration. From the St. Louis Fed,
M2:

As a 'bottom feeder' biased chart guy, what I see in the green M3 line is
a gentle, rolling bottom. The kind of bottom I usually buy.

The US continues inflating and the bond is the confidence tool used to promote
the ongoing, systematic inflation that, other than benefiting those speculators
who know how to use the process, would stiff foreign creditors and tax the
American people in a way they are not generally yet up in arms about; the loss
of purchasing power of the US currency in which they are compensated and in
which they conduct commerce.

Was the May 'Flash Crash' a surrogate 'deflation' event off of the modest
peaks in MZM and M3 (and the mere flattening of growth in M2)? This event certainly
provided the bullish fuel for the next leg up in markets, led by silver and
the precious metals complex. Was that the afterburner needed to propel the
long bond's yield into an upside channel buster? Or will the bond be rigged
in new and innovative ways as the Fed does its duty as the buyer of last resort?

Are they the buyer of last resort? What about patriotic Americans and all
that retirement fund money just sitting there? Surely they could buy bonds
as well, for the greater good. IRA holders are in bed with Uncle Sam after
all, as he sponsors these vehicles and defers their taxes. We know one thing,
somebody has got to buy enough bonds to keep the pretense in place that things
remain in control.

Summary: The ability to continue the inflation is centered on Treasury
bonds. Ironically, the ongoing inflation depends on widespread belief that
deflation can happen and must be fought. Deflation can happen all right, but
it will be the FINAL deflation, with no coming back from it, at least within
the confines of the current system. So it will be important to observe the
yield's approach of the EMA 100 and its subsequent reaction. Will the yield
turn down and continue the boom-bust continuum, or will it go channel buster
up in an inflationary signal that even the most casual observers will take
note of as a collective 'Rut Roh!' is emitted far and wide?

We do not have the answer yet and thus, risk is elevated for bulls and bears,
inflationists and deflationists. That is because we are once again at a flash
point. Ben Bernanke is trying like hell to keep the inflation going, and with
the mind boggling trillions in still increasing debt, there is only one politically
expedient way out. That would be to keep the scheme going as long as possible.
But please do not tell me that here, on the doorstep to 2011, sublime levels
of unpayable debt in tow, we have not already hyper inflated. We have, but
the ongoing T Bond confidence scheme continues to cover it up... for now.

Now let's proceed to the good stuff, the investment stance and vehicles used
to capitalize on this sad state of affairs...

[NFTRH then
proceeds on with an extensive update of gold vs. currencies and commodities,
precious metals technical analysis, portfolio structure (speculative portfolio
+39% for 2010) and a sentiment view of the broad markets, which is at an extreme.]

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expressed on this site. If you speculate or invest it is suggested that you
consult a financial advisor qualified in your area of interest.